How ETF investors are unique — and why it matters to advisors

An overwhelming majority of Canadian investors don’t use ETFs, and more than half don’t even know what they are, research from Credo Consulting Inc. says.

Despite the growing number of ETFs in Canada, the products are still primarily used by wealthier investors, said Credo’s managing director Hugh Murphy, explaining his firm’s research Wednesday at a Toronto ETF summit presented by Advisor’s Edge and Investment Executive.

The research was conducted on behalf of the Canadian ETF Association to understand who’s buying ETFs and who’s not — and why.

“ETFs, as a product set, have nothing but a massive runway ahead of them,” Murphy said, with 94% of investors saying they don’t yet use them.

Promoting greater awareness and comprehension will be key. For investors who don’t use ETFs, the main barrier cited is lack of knowledge, with 52% saying they don’t know what an ETF is.

Unsurprisingly, cost is the number-one reason investors say they use ETFs, with low management expense rations cited by almost two-thirds of survey respondents (64%), followed by low acquisition costs (56%) and ease of diversification (53%).

While the low-cost narrative dominates the ETF space, Murphy said, advisors can tell a different story by highlighting their value and advice.

In fact, highlighting advisory value to ETF investors, in particular, is an important consideration for advisors, the research indicates.

For example, relative to investors who don’t use ETFs, ETF investors are more likely to consider finding a new advisor, to know exactly how much they pay in fees and to conduct their own research to validate their advisors’ recommendations. They’re also less likely to say their advisors put clients’ best interests first.

From the research, Murphy presented several such differences between these two groups of investors, many of which likely reflect that ETF use is a function of wealth and age. For example, relative to non-ETF investors, ETF investors rank retirement and investments as more important financial matters than the family car, child care and insurance. They also care more about taxes, charitable giving and vacation property.

They also rank financial well-being higher than those who don’t use ETFs, and their financial comfort zone is greater: ETF investors are considerably more likely to say they’re comfortable speaking to financial professionals; they regularly check their progress toward achieving their financial goals; and they take financial risks.

Further, they scored higher on a financial literary test: 83% versus 75% for investors with no ETFs, which Murphy called “significant.”

The differences don’t end at financial considerations. ETF investors also rank life measures such as social relationships, recreation and healthcare higher than non-ETF users.

Murphy said these characteristics might help advisors better understand clients and potentially help identify when to incorporate ETFs in a client’s portfolio.

ETF opportunity

With so few investors using ETFs, the research shows plenty of opportunity for the industry to increase market penetration among retail investors.

Creating awareness will require understanding clients and how to best communicate with them. Murphy described a wealthy widow who switched firms because her advisor spoke only in technical terms, attempting to explain standard deviations to her, when what she was really looking for was reassurance. Financial speak “doesn’t resonate with the typical investor,” said Murphy.

Robo-advisors — and Canadians generally — likely have something to gain from increased ETF knowledge. Despite investors who use ETFs citing cost as the primary reason, ETF use is particularly low among investors with less than $250,000 in investable assets.